“Fight as you train – Train as you fight”
Let’s start with the cool stuff:
I am sure you must have seen videos of Boston Dynamics’ Robot Dog. Well, Zen Tech is trying to do something along similar lines next year for the Armed Forces. Interesting, isn’t it? Here is the demo:
For the time being, this is more of a PR activity from Zen Tech than anything substantial. Now, the real deal:
Zen Technologies was founded by Mr. Ashok Atluri in 1993, who is still leading it, with its HQ in Hyderabad, Telangana. They cater not only to the Indian Army but also export their products, mainly to the Middle East, Africa, and CIS countries.
The company has two main verticals: Simulation & training for the Armed Forces, and Anti-drone solutions.
- Simulation & Training: This has been their primary focus area for about three decades. They create training systems that allow military teams to practice real-world combat situations, whether with live ammunition or virtual setups. It’s like giving them a safe way to become battle-ready.
- Anti-drone Solutions: Zen forayed into anti-drone solutions in 2021, and this is now their fastest-growing segment. They focus on stopping rogue drones—whether by jamming them or taking them down—to ensure the safety of military bases, industries, and public spaces from aerial threats. Please don’t confuse this with building drones. No, Zen Tech is not into manufacturing of drones (like IdeaForge). They are only into anti-drone systems for now.
From day 1, the company has been focused on R&D and creating its own IP. They have invested over 150 Cr in the last 10 years into R&D. Sure, on the face of it, the number looks small. But it was around 12% of their cumulative revenue and 40% of their cumulative EBITDA. That’s some commitment for a small company like Zen Tech.
Defence: A multi-year tailwind
India’s defence sector is really picking up speed, and it’s all thanks to a perfect storm of government initiatives and market potential. The country is moving from being one of the top importers of defence equipment to ramping up its own manufacturing, thanks to huge pushes like Atmanirbhar Bharat and Make in India. These programs aren’t just slogans—they’re backed by serious cash. The defence budget alone jumped 13% to 5.9 Lac Cr in FY24 and keeps climbing, which shows just how committed the government is to building a self-reliant defence ecosystem.
What’s driving this boom? The focus on indigenization is massive. India wants 70% of its defence needs to be met at home by 2027, and the numbers back up that ambition. Exports have already surged, hitting nearly 16,000 Cr in FY24, and that’s just the start. The creation of Defence Industrial Corridors in Tamil Nadu and Uttar Pradesh is also a big move. These hubs are signing deals and attracting billions in investments, making them a key part of the growth story.
More specifically, regarding simulators, the Ministry of Defence 2021 released a framework to increase the utilisation of simulators by the three Services and the Indian Coast Guard. The goal is to shift to simulation-based training for safer and more cost-effective learning. The focus is on homegrown design and outsourcing simulator maintenance to Indian companies. This policy applies to all current and future simulators, aiming to reduce equipment wear and enhance readiness while keeping training costs in check. However, please note that this is just a framework and nothing concrete as yet.
*Source: PIB Press Release Sep 2021
And one more—a few days back, the IAF chief emphasized the need for more private players to chip in, given the limitations of PSU Defence players.
*Source: Moneycontrol
In short, the defence sector is poised for a major shift, and the tailwinds from all these initiatives are pushing India towards becoming a global defence powerhouse.
Post FY23: A Leap Towards Growth
FY23 was the game-changer—revenue shot up by 200%, EBITDA exploded by 700%, and a jaw-dropping 1750% in PAT.
Looking back, it’s clear they were in the right place at the right time. Sure, they’d been preparing for 3 decades, but it was in the last few years that everything started to fall into place. The government’s increased focus on training and simulation (52k Cr set aside for local defence equipment, an export target of 35k Cr by 2025, quicker government payments, Agnipath Pravesh Yojna, etc.) really boosted their momentum.
Their anti-drone system gained strong traction, and by the end of FY23, they had a solid order book with 219 Cr in revenue and an impressive 472 Cr in orders. Exports also saw a massive leap, going from 2.8 Cr in FY22 to 55 Cr in FY23. It’s safe to say things changed for the better.
In the last three years:
- Revenue grew by 78% CAGR to be 161.4 Cr
- Gross margins remained healthy at around 55%
- EBITDA grew at 131.8% CAGR over the same period
- PAT grew at 180% CAGR, on the back of improving margins
- Return ratios are strong (ROE at 33% & ROCE at 46%)
- Debt-free balance sheet & have around 110 Cr of cash on the books
You must be wondering:
FY25 & Beyond
- The TTM sales stand at 562 Cr, and the company has an order book of 1,158 Cr, giving us strong growth visibility.
For FY25, the management has guided for a revenue target of 900 Cr (2x from FY24 revenue).
The management is confident about sustaining EBITDA margins at 35% and PAT margins at 25%.
AMC (Annual Maintenance Contract) is expected to be a major growth driver. It refers to the services provided by the company once the product is delivered, typically kicking in after the third year of installation. Currently, AMC revenue contributes less than 10% of the overall revenue. Out of the 1,158 Cr order book, around 257 Cr comes from AMC orders.
The Anti-drone segment is scaling up well with an increasing order pipeline. This segment has grown from zero to almost 35% of revenue in three years and is expected to contribute half of the sales in the next couple of years.
Meanwhile, the cool robo dog you saw earlier may take more than a year to launch and begin contributing to revenue
Have defence stocks gone too far?
Yes, there is no denying that. Let’s look at it with two parameters.
First, in the July 2024 budget, the government allocated 6.2 Lac Cr as the defence budget. While this is significantly above last year’s budget of 5.9 Lac Cr, there was a slight disappointment as expectations were much higher than the allocated 6.2 Lac Cr. But we need to understand one thing: the defence budget is one area you can’t cut back on for too long. It’s just a matter of time before pent-up demand surfaces, whether domestically or through exports.
Second, all defence stocks seem to be taking a pause. No big announcements in the budget, sector rotation, or high valuations—whatever the reason, the entire pack has been slowly cooling off. Names like HAL, BEL, BDL, Data Patterns, and Paras Defence are down around 20-35% from their recent highs. However, does this indicate a change in the multi-year tailwind for defence? I doubt it. This looks more of a pause in the long-term growth trajectory. We remain bullish on the defence sector for the next 3-5 years.
Good time to buy Zen Tech?
We hold Zen Tech in our Capitalmind Premium portfolios, so please understand that we are biased.
The management is confident about achieving 900 Cr in revenue by FY25, with expectations of around 1,200 Cr by FY26, while maintaining 35% EBITDA margins and 25% PAT margins. This brings us to an FY26E EBITDA of around 420 Cr and PAT of ~300 Cr.
Currently, the company is trading at a market cap of 15k Cr and a similar enterprise value, indicating a two-year forward EV/EBITDA of around 35 times and a PE of around 50 times. Certainly not cheap. However, with visible growth drivers like increasing demand for anti-drone systems, new product launches, and, more importantly, the sectoral push from the government, the company makes for a decent long-term bet even at current valuations.
Disclosure: I, Krishna Appala, Research Analyst, author, and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific view(s) in this report.
Research Analyst or his/her relative or Capitalmind Research LLP does not have any financial interest in the subject company. Also, the Research Analyst, his relative, Capitalmind Research LLP, or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or Capitalmind Research LLP or its associate does not have any material conflict of interest at the time of publication of this research report.
Also, Zen Tech is a part of our Capitalmind Premium Portfolios. This article is intended solely for informational purposes and should not be considered as an investment recommendation.
Capitalmind Research LLP is a SEBI Registered Research Analyst having registration no. INH000014003.
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